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How Does Capital One Make Its Money?

Capital One (NYSE: COF) is best known for its credit card business, but there's more to this regional bank than that. In this Fool Live video clip from the Nov. 16 Industry Focus show, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the basics of Capital One's business and what investors should know.

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Jason Moser: Let's just jump in. First off, with Capital One, I mean, it's understanding exactly what this business does and I think first and foremost, we see a lot of the commercials out there with Samuel L Jackson, Jennifer Garner, they keep asking me that question over and over again. "What's in your wallet?" That's the Capital One we're talking about, right? But this is more than just a credit card company, ain't it?

Matt Frankel: Yeah, well, technically, they're a regional bank. As a consumer, you are probably more familiar with Capital One than I am because they are in your area, but not mine.

Jason Moser: They are. Yeah, McLean, Virginia. It's home-based up here in McLean, Virginia.

Matt Frankel: Funny story. I got my first Capital One credit card when I was in college, but I didn't know they were an actual physical bank until I first went to DC and saw a Capital One branch. I think there was a Capital One ATM in the airport.

Jason Moser: Yeah.

Matt Frankel: I had no idea there were an actual physical bank until then.

Jason Moser: Well, physical bank, but much like many banks, they're starting to whittle back that physical presence too, right? I mean, they're definitely, we'll get into this, but they are certainly trying to become more of a digital and virtual bank as many are.

Matt Frankel: Well, yes and no. They are scaling back their branch network to some degree, but they're also, Capital One, correct me if I'm wrong, they are the ones who are opening cafes inside some of their branches. They're trying to really double down on the more high traffic and valuable branches that people are actually going to, they're doubling down on those locations. I remember reading the Capital One cafe story a while ago. I don't know if there's a Capital One cafe near you.

Jason Moser: I don't know, I've seen the commercials. I mean, it's interesting to me. I've seen those commercials and it always makes me wonder, it's almost like they're trying to be Starbucks (NASDAQ: SBUX) and The Third Place. It's like, is a bank really where you want to go sit and just hang out? I don't know. I mean, I guess it doesn't resonate with me, but I also understand I'm an old guy compared to a lot of these younger consumers they're pursuing. So maybe there's something there. I don't know.

Matt Frankel: Maybe. I mean, they're definitely taking a more quality over quantity approach. They're not just scaling back, I mean, Bank of America is just closing down branches. Wells Fargo is just closing down branches. They're really like doubling down on their core branches, I guess I'd say. But they are a branch-based bank, they're regional bank. I know the capital in Capital One refers to DC. So they are regional banks. They have branches. If you're not in the DC area or some other major cities in the Northeast, you might not know that. In South Carolina, for example, we don't have Capital One branches. They are unique in the sense that they are a lender, but all banks lend money. At the core of the banking business, you lend money, you take in deposits, you pay them at one interest rate, you charge another interest rate to your customers when you're making out loans, and your profit is the difference. Where Capital One is really different is because they are primarily a credit card lender. That is not the case for most other banks. For example, I know like Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC) have mortgage loans, auto loans. They are not primarily a credit card lender, they all have credit card products. But for Capital One, just to mention one of the numbers, they ended 2019 with almost half of their loan portfolio as credit cards.

Jason Moser owns shares of Starbucks. Matthew Frankel, CFP owns shares of Bank of America and Wells Fargo and has the following options: short January 2021 $23 puts on Bank of America and short November 2020 $22.5 puts on Wells Fargo. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.


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